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Richard Russell belatedly begins to have a clue
By Harlan Levy
Journal Inquirer, Manchester, Connecticut
Friday, September 9, 2005
http://www.journalinquirer.com/site/news.cfm?
newsid=15197957&BRD=985&PAG=461&dept_id=161556&rfi=6
A Canadian report charges that the U.S. government has been
surreptitiously intervening in the American stock market, buying
shares in conjunction with private parties to prop it up to
prevent "destabilizing" declines.
The problem, Toronto-based Sprott Asset Management said in its
report, is that this under-the-table manipulation may lead to abuses
that could seriously hurt unsuspecting investors and the overall U.S.
economy.
"Most people probably assume that the U.S. stock market is free of
government interference," Toronto-based Sprott Asset Management
authors John Embry and Andrew Hepburn said. "Current mythology holds
that share prices rise and fall on the basis of market forces alone.
Such sentiments appear to be seriously mistaken."
The Sprott report quotes publications that "strongly suggest that
since the October 1987 crash, the U.S. government has periodically
intervened.
For proof, Sprott cites former presidential adviser George
Stephanopoulos' comments and some British press reports as evidence
that appears to "confirm suspicions that the United States has a so-
called 'Plunge Protection Team.'"
The private/public team consists of government agencies, stock
exchanges, and large Wall Street firms and was apparently created in
1989 "as an outgrowth of the President's Working Group on Financial
Markets," Sprott said.
The team is not merely concerned with the stability of the stock
market, Sprott charged, citing Stephanopoulos' revelation in 2001 --
when he was an ABC correspondent -- that at the time of the Long Term
Capital Management crisis in 1998 the Federal Reserve directed large
banks to prop up the currency markets. The move aimed to "diffuse a
global currency crisis" when the U.S. dollar plummeted against the
Japanese currency.
Sprott also claimed that in response to the Sept. 11 terrorist
attacks, the Federal Reserve and large Wall Street firms were ready
to buy stock if panic selling occurred. Before the 2003 Iraq
invasion, the U.S. and Japan agreed to intervene in the stock markets
if a financial crisis developed during the war, Sprott said, although
the U.S. never publicly revealed the move. However, a Japanese
official announced the accord, Sprott said.
The firm also cites a 1989 USA Today story that asserted that
government regulators asked private parties to buy stocks in October
1989 to block a plunge like the October 1987 debacle.
Moreover, Sprott refers to a 1989 Wall Street Journal op-ed piece by
former Federal Reserve governor Robert Heller, who suggested that the
central bank should be able to purchase stock index futures contracts
to stabilize plunging markets.
Finally, Sprott quoted a 1992 New York Post article in which a former
National Security Council economist confirmed that the U.S.
government made moves like the ones that Heller proposed in 1987,
1989, and 1992.
"Much of the information is evidence of intent to intervene, rather
than proof of manipulative activities themselves," authors Embry and
Hepburn admitted. "That the government has given such serious
consideration to supporting the stock market demonstrates its
willingness to cross an important line, violating the traditional
American belief in unfettered markets."
Although Embry and Hepburn state that they can establish that the
government has intervened in the stock market, they can't provide
provable details.
"This is due to the utter lack of official disclosure of market
interventions," they wrote.
Nevertheless, the authors acknowledged that they took known
information and added "what we think to be reasonable conjecture."
A negative result of federal silence, the authors concluded, is
that "the government's unwillingness to disclose its activities has
rendered it very difficult to have a debate on the merits of such a
policy."
Market manipulation is not necessarily a bad thing, the authors said,
citing an alleged government prop-up right after the Sept. 11 attacks
and immediately following the calamitous crash in 1987.
However, they contend that such actions must be open and under tough
controls to prevent abuses or unpleasant consequences.
"There can be no doubt that the firms responsible for implementing
government interventions enjoy an enviable position unavailable to
other investors," the report said. "Whether they have been
indemnified against potential losses or simply made privy to
government policy, the major Wall Street firms evidently responsible
for preventing plunges no longer must compete on anywhere near a
level playing field."
And if manipulation fails to work, disaster could follow, the authors
contended. For instance, market conditions today are calm and
relatively stable in spite of severe trade and budget deficits,
rising interest rates, and sky-high oil prices.
That's suspicious, the authors said, and may mislead investors if and
when economic reality causes a crash, surprising them and catching
them unprepared.
A Federal Reserve Board spokesman said the Fed normally does not
comment on speculations and reports on its actions.
U.S. Securities and Exchange Commission spokesman John Heine declined
an opportunity to comment. The U.S. Treasury Department could not be
reached for comment.
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